MONEY AND CREDIT

* Money as a Medium of Exchange :

→
Money acts as medium of exchange ,
stones different values

→
Generally these are seen as
paper money and coin .

• Consider a case where money is not used as

medium :

→
Take the case of a shoe manufacturer .

→ He wants to sell his shoes and buy wheat .

→ For this he requires a wheat farmer who wants to

buy shoes .

→ THIS SYSTEM IS CALLED DOUBLE COINCIDENCE OF WANTS .

→
This type of system is also known as BARTER
SYSTEM .

•
Barter is medium in which goods ( services are
exchanged
directly without a common unit .

*
Why transactions were made in
money ?
•
Money works as an intermediate .

It used medium of for

is as a
exchange goods
•

and services .

* Ancient Period :

→
Grains ,
cattle were used as money .

* Medieval Period :

→
Metallic coins of gold ,
silver , copper ,
dead were used
as
money .

* Modern Period :

→
Paper money ,
coins are used .
*
Modern forms of Money

Currency Deposit ( Cheque

Banks
Paper Notes Coins

*
Why Money is accepted as medium of
exchange ?
It is authorised by of country
government
•
.

•
In India Reserve Bank of India issues currency
,

notes the behalf the

on of government .

* Modern Forms of Money :

it Cheque :

it Credit and Debit card :

*
Deposition of Money in Banks :

•
People deposits money in banks and bank provide
interest in the deposited amount .

People can withdraw the money as they require .

* Demand Deposit
•

Deposits in the bank that can be withdrawn

on demand .
•
Demand deposit share essential feature of Economy .

•
Demand deposit accepted widely as a means of payment
along currency .

•
Constitute money in modern
economy .

*
Cheque :

4 Paper instructing bank by a specific amount from

the person 's account to the
person 's in whose name

the cheque has been issued .

*
Working of Banks :

Bank keeps only

small part of deposits
as cash

Bank earns
from
the difference in interests Major cash
part of
of deposits and loans is used to loan
give
to
people

Higher interests rates

are
changed on Toons

* Credit ( LOAN) :

4 It the lender supplies and

is
agreement in which
borrower with money , goods or services in return for
the promise of future payments .

→ Positive :

Done loan
successfully able to repay the with
needed
completing his goal for which
money was .

a) Festival Leason :

t It is festival season .
two months from now and
the shoe manufacturer ,
Salim ,
has relieved an order from
trader
a
large in town
for 3,000 pairs of shoes to
 be delivered in a month time .

-
To complete production on time ,
Salim has to hire
a
few more workers for stitching and pasting work .

-
He has to purchase the raw materials .

To meet these expenses ,

Salim obtains loans from two
sources .

-
First ,
he asks the leather supplier to supply leather
now and promises to pay him later .

-
Second ,
he obtains loan in cash from the large
trader as advance payment for 9000
pairs of shoes
with a promise to deliver the whole order by the
end of the month .

-
At the end of the month ,
Salim is able to deliver
the order ,
makes a
good profit ,
and repay the money
that he had borrowed .

→
Negative :

t One is not able to

repay loan or gets in loss .

2) Swapna 's Problem :

t Swapna ,
a small
farmer , grows groundnut on her three
acres of land .

She takes a loan from the moneylender to meet

the expenses of cultivation , hoping that her harvest would
help repay the loan .

Midway through the season the crop is hit by pests

and the crop fails .

Though Swapna sprays her crops with expensive pesticides ,

it
makes little difference .

She is unable to the moneylender and the debt

repay
-

over the into the into large

grows year year a

amount .

Next
year , Swapna takes a
fresh loan for cultivation .

It is a normal crop this

year .

But the not to the old

earnings are
enough cover
-

loan .

She is debt
caught in
-

She has to part the land to off

sell a of pay
-

the debt .
* Debt Trap :

t It is a situation in which a borrow is led to a

cycle of reborrowing ,
or rolling over ,
their -
loan payments
because they are unable to
pay the old loan .

er This leaves them indebted all through their life .

* Terms of Credit :

-
Interest Rate
collateral
O'ocumentation

Mode of Repayment

* Collateral ( SECURITY) :

f Collateral is an asset that the borrower owns ( such as

land building
, ,
vehicle ,
livestock deposits
,
with banks) and uses this as

a guarantee to a lender until the loan is repaid .

J If the borrower fails to repay the loan ,

the lender has
the right to sell the asset or collateral to obtain

payment .

* Interest Rate :

t Formal sector demands less rate of interest compared to

informal sector .

Itt present , formal sectors demand 8%-927 . interest rate .

* Documentation :

t Documents showing employment records and salary before the

bank agreed to
give her the loan .

fr It also includes collateral papers , identity proof and some

other details .
* Mode of Repayment :

I The borrower should back the interest and the

pay
principal amount weekly or monthly by cash or
cheques
as decided at the time of making
,
arrangement .

* Loans from Cooperatives :

t Cooperative societies are small scale organization formed by

people themselves .

I The members of Cooperatives pool their resources in the

account of the cooperative and then extend loans to
those in need .

t
Cooperatives also takes loan from banks .

F There are several types of cooperatives such as Krishna

cooperatives ,
Weaver 's cooperatives industrial
,
worker 's cooperatives ,
etc .

* Difference between Formal and Informal Sector

→
But poor people are still dependent on informal
source
of credit because :

•
Lack of banks in some of the rural areas .

Proper documentation and collateral are not present in

many of the cases .

To overcome the problem , people created SELF HELP GROUPS

GHGs)

*
Self Help Group :

These are small of poor people which promote

groups
•

small
savings among their members .

•
A topical SHG has 95 to 20 members , usually belonging to one

who
neighbourhood ,
meet and save
regularly .

*
Advantages of SHG :

→ It helps borrowers to overcome the problem of lack of

collateral .

→
People can get timely loans for a
variety for purposes
and at reasonable interest .

Slots blocks rural

building of organisation of the
→
are
poor .

→ The regular meeting of group provides a platform to discuss

and act on a variety of social issues such as health ,

nutrition ,
domestic violence ,
etc .

→ It helps women to become financially independent .

 1 Mark Questions

1. Give one example each of modem currency and older currency.

[1M, 2019]
A1. An example of modem currency is the plastic money that
. we use in the form of debit and credit cards.
An example of older currency is the bronze coins that were .
. used in earlier times.

2. Why do banks or lenders demand collateral against loans?

[1M, 2019]
A2. Collateral is something of value an asset or property that .
. the borrower pledges when getting a loan, such as land,
. building, vehicle etc.. This is used as a guarantee by the
. lender until the loan is repaid. If the borrower fails to repay
. the loan, the lender is free to sell the collateral and
. reimburse his amount. Thus collateral acts like a guarantee
. against loan.
3. Give any two examples of informal sector of credit.
[1M, 2018]
A3. I) Moneylenders
II) Traders

4. How does the use of money make it easier to exchange things ?

Give an example
[1M, 2017]
A4. Money makes exchanging things easier as:
It is in the form of authorised paper currency which gives
the guarantee of the mentioned price to the owner.
It has general acceptability.
Its price remains constant compared to other
commodities.

5. How is the maximum retail price printed on packets beneficial

for you?
 [1M, 2017]
A5. Through printed Maximum Retail Price (MRP) on the packets
. or products, consumers get to know that they do not have to
. pay prices more than the printed price. Then, the
. shopkeeper cannot cheat the consumers by overcharging
. them.

6. Highlight the inherent problem in double coincidence of wants.

[1M, 2017]
A6. Double coincidence of wants means that when someone
. wants to exchange his goods with another person, the latter
. must also be willing to exchange his goods with the first
. person. It can only work when both the persons are ready to
.

7. Why are most of the poor households deprived from the formal
sector of loans?
[1M, 2016]
A7. Most of the poor households are deprived from the formal
. sector loans because of lack of proper documents and
. absence of collateral.
 8. Prove with an argument that there is a great need to expand
formal sources of credit in rural India.
[1M, 2016]
A8. There is great need to expand formal sources of credit in
. rural India because:

1. There is no organisation that supervises the credit

activities of lenders in the informal sector. They lend at
whatever interest rate they choose.
2. No one can stop rural money-lenders from using unfair
means to get their money back.

9. Why is the supervision of the functioning of formal sources of

loans necessary?
[1M, 2016]
A9. Supervision of the functioning of formal sources of loans is
. necessary because banks have to submit information to the
. RBI on how much they are lending, to whom they are lending
. and at what interest rate etc.
10. Compare formal sector loans with informal sector of loans
. regarding interest only.
[1M, 2016]
A10. Most of the informal lenders charge a much higher interest on
. loans than the formal sector loans.

11. Why one cannot refuse a payment made in rupees in India?

[1M, 2016]
A11. One cannot refuse a payment made in rupees in India
. because it is accepted as a medium of exchange. The
. currency is authorized by the government of the country.

12. How do the deposits with banks become their source of

income?
[1M, 2016]
A12. Banks charge a higher interest rate on loans they extend
. than what they offer on deposits. The difference of interest is
. the main source of income of banks.

3 Marks Question

13. Why is it necessary to increase a large number of banks

mainly in rural areas? Explain.
[3M, 2019]
A13. It is important to open more banks in rural areas as the
. formal credit sector is missing. The practice of borrowing from
. an informal sector that exists in rural areas, for example, local
. money lenders, has a number of disadvantages.
The informal sector charges high rate of interest. Informal
. sector makes loans very expensive as there are no external
. organizations controlling the credit activities of lenders.
Informal sector involves high degree of risk as there are no
. proper set of rules for repayment and there is a lot of
. exploitation of the poor farmers.
14. Why are service conditions of formal sector loans better than
informal sector?
[3M, 2019]
A14. Formal sector:
This sector is mainly supervised by the RBI.
It includes banks and cooperatives and thus every clause
is in writing and very clear.
In this, collateral is required.
It provides loans comparatively at lower rates.

Informal sector:
No external organisation supervises this sector.
The lenders are mainly money lenders, friends, relatives,
traders and landowners etc.
Collateral is not required, thus it involves risk.
This sector charges higher interest rates without any
rules or regulation.
This could lead to a debt trap.

15. Describe the importance of formal sources of credit in

economic development.
[3M, 2019]
A15. Importance of formal sources of credit in economic
. development are as follows:
 It is monitored by the Reserve Bank of India or regulated by
government of India and thus helps in bringing order to the
system of lending and borrowing in the country.
Provides fixed interest rate to all sections of society.
Limits the scope of using unfair means to repay the payment.
Less interest rate and accessible to all, rich or poor.

16. Describe the bad effects of informal sources of credit on

borrowers.
[3M, 2019]
A16. Following are the bad effects of informal, sources of credit:
They are not subordinate to any government organisation
like RBI, thus there is no official backing or monitoring
agency.
Absence of a fixed interest rate increases the scope of
exploitation.
Increases the probability of scope of using unfair means to
get back their payment.
Higher interest rates, with no official records, often lead to
debt traps.
17. Why is cheap and affordable credit important for the cou
development? Explain any three reasons.
[3M, 2018]
A17. Cheap and affordable credit plays a crucial role in the
.
The credit helps people to meet the ongoing expenses of
production and thereby develop their business in
agricultural and industrial areas.
For middle-class people, loans help a lot in constructing
their houses and to get rid of monthly rents.
It raises the standard of living and social status of the
common man by enabling them to buy automobiles,
electronic items etc.

18. Explain any three loan activities of banks in India.

[3M, 2017]
A18. Activities of banks in India who are involved in providing loan:
Banks provide loans for various economic activities.
Banks intermediate between those who have surplus
funds and those who are in need of these funds.
Banks offer very less interest on deposits than what they
demand on loans.
19.
statement with arguments.
[3M ,2016]
A19.It refers to an agreement in which the lender supplies the .
. borrower with money, goods or services in return for the
. promise of future repayment.
1.
growth and economic development. Credit is in great
demand for various kinds of economic activities big or
small investments, to set up business, buying cars, houses,
etc.
2. In rural areas credit helps in the development of agriculture
by providing funds to farmers to buy seeds, fertilizers,
expensive pesticides.
3. Manufacturers need credit for buying raw material or to meet
ongoing expenditure of production. Credit helps in the
purchase of plant, machinery, equipment, etc.
4. Some people may need to borrow for illness, marriages etc.
Thus, cheap and affordable credit is crucial for the
growth and economic development.

20. How can money be easily exchanged for goods or services?

Give an example to explain.
 [3M, 2016]
A20.
Money as a medium of exchange for goods and services:
A person holding money can easily exchange it for any
commodity or service that he or she might want. Everyone
prefers to receive payments in money and exchange the
money for things they want.

For example: A shoemaker wants to sell shoes in the market

and buy wheat. The shoe maker will first exchange shoes for
money and then exchange the money for wheat. If the
shoemaker had to directly exchange shoes for wheat without
the use of money, he would have to look for a wheat growing
farmer who not only wants to sell wheat but also wants to buy
the shoes in exchange. Both the parties have to agree to sell

difficult, time consuming and unhealthy.

21.
arguments.
[3M, 2016]
A21. The credit activities of the informal sector should be
. discouraged because:
1. 85% of loans taken by the poor households in the urban areas
are from informal sources. There is no organisation that
supervises the credit activities of lenders in the informal
sector.
 2. Informal lenders charge very high interest on their loans: They
try to charge more and more interest on their loans as there
are no boundaries and restrictions.
3. Higher cost of borrowing means a larger part of the earnings
of the borrowers is used to repay the loan.
4. In certain cases, the high interest rate for borrowing can mean
that the amount to be repaid is greater than the income of
borrower. This could lead to increasing debt and debt trap,
therefore the credit activities of the informal sector should be
discouraged.

22. Deposits with the banks are beneficial to the depositors as

[3M, 2016]
A22. Benefit of deposits to the depositors:
1. Bank accepts the deposits and pays interest to the
depositor.
2. Banks help people save their money and keep their
money in safe custody of the bank.
3. People can withdraw the money as and when they
require.
4. Banks also grant loans to people for a variety of
purposes. In times of need, individuals, business houses
and industries can borrow money from the banks.
 5 Marks Question

23.
In the light of this statement explain as to who can provide them
at a reasonable cost, the private or the public sector and why?
[5M, 2017]
A23. Society as a whole needs several things which the private
. will not be able to provide at a reasonable cost.

Reasons for this are:

1. Activities in the private sector are guided by the motive to
earn profits and not welfare of the people.
2. There are several services needed by the society which
the private sector cannot provide at a reasonable price.
Activities like construction of roads, bridges, railways,
irrigation through dams, etc., require huge amount of
money which is beyond the capacity of the Private sector.
Private sector charges high rates for the use of these
services.
3. It is difficult for the Private sector to collect money from
thousands of people who use these services.
4. The Private sector sometimes ignores regional balanced
development, equality of income and development of basic
industries.
5. Private sector charges include profit margins whereas the
government will charge a reasonable price for services. It
 is the primary duty of the government to ensure the
provision of public facilities with a service motto

24. . How can the formal sector loans be made beneficial for poor
farmers and workers? Suggest any five measures
[5M, 2016]
A24. Formal sector loans can be made beneficial for poor farmers
. and workers in the following ways:
1. Create greater awareness among farmers about formal sector
loans.
2. Process of providing loans should be made easier. It should
be simple, fast and timely.
3. More number of Nationalized Banks/cooperative banks should
be opened in rural sectors. Banks and cooperatives should
increase facility of providing loans so that dependence on
informal sources of credit reduces.
4. The benefits of loans should be extended to poor farmers and
small scale industries.
5. While formal sector loans need to expand, it is also necessary
that everyone receives these loans. It is important that formal
credit is distributed more equally so that the poor can benefit
from cheaper loans.
25. Describe the vital and positive role of credit with examples.
[5M, 2016]
A25. In the festive season, a shoe manufacturer, Ram receives an
. order from a large trader in town for 3,000 pairs of shoes to
.
. time Ram has to hire workers for stitching and pasting work.
. He has to purchase the raw materials. To meet these
. expenses Ram obtains loans from two sources.
First, he asks the leather supplier to supply leather now and
promises to pay him later.

Second, he obtains loan in cash from the large traders as

advance payment for 1000 pairs of shoes with a promise to
deliver the whole order by the end of the month.

At the end of the month, Salim is able to deliver the order,

make a good profit and repay the money he had borrowed.

Salim obtains credit to meet the working capital needs of

production. The credit helps him to meet the ongoing
expenses of production, complete production on time and
thus increase his earnings. Credit therefore plays a vital and
positive role in this situation.

26. How do banks play an important role in the economy of India?

Explain.
 [5M, 2015]
A26.
1. Banks help people to save their money and keep their money
in safe custody. To ensure safety of their money, people
deposit their money with banks. Banks accept deposits and
pay interest on deposits. People have the provision to
withdraw their money as and when they require.
2. Banks also grant loans to people for a variety of purposes. In
times of need individuals, business houses and industries can
borrow money from the banks.
3.
and economic development. Credit is needed for all kinds of
economic activities, to set up business, buy cars, houses, etc.
4. Banks also help people in obtaining cheap and affordable
loans. This can help people to grow crops, do business, set up
small-scale industries or trade in goods and also help
indirectly in the count
that relatively poor people do not have to depend on informal
sources of credit (money-lenders)

27. What is credit? Explain with an example, how credit plays a

vital and positive role for development.
[5M, 2014]
A27. Credit means loans. It refers to an agreement in which the
. lender supplies the borrower with money, goods or services in
. return for the promise of future repayment.
 1. Cheap and affordable credit i
growth and economic development. Credit is in great
demand for various kinds of economic activities big or
small investments, to set up business, buying cars,
houses, etc.
2. In rural areas credit helps in the development of
agriculture by providing funds to farmers to buy seeds,
fertilizers, expensive pesticides.
3. Manufacturers need credit for buying raw material or to
meet ongoing expenditure of production. Credit helps in
the purchase of plant, machinery, equipment, etc.
4. Some people may need to borrow for illness, marriages
etc.
Thus, cheap and affordable credit is crucial for the

28. What are the various sources of credit in rural areas? Which
one of them is the most dominant source of credit and why?
[5M, 2013]
A28. Moneylenders are the most dominant amongst sources of
. credit for rural households. They constitute an informal
. source of credit. They charge a very high rate of interest on
. loans as they do not require any collateral. They are the most
. convenient source of credit in the rural areas.

Other sources of rural credit:

 1. Cooperative Societies are another major source of rural
credit. They are a source of formal sector credit. Members
of a Cooperative pool their resources for helping one

Cooperatives, etc. They offer cheap credit in rural areas for

their members. Once these loans are repaid, another round
of loans is offered.
2. Agricultural traders, relatives and friends are other informal
sources of rural credit. Some farmers borrow from
agricultural traders who supply the farm inputs (such as
seeds, fertilizers, pesticides, etc.) on credit at the beginning
of the cropping season and repay the loans after the
harvest.
3. Commercial banks also give loans to rural households.
However, not many rural households borrow from banks as
they require proper documentation and collateral.

29. Which government body supervises the functioning of formal

sources of loans in India? Explain its functioning.
[5M, 2012]
A29. The Reserve Bank of India supervises the functioning of
. formal sources of loans.

Functions of Reserve Bank of India.

1. RBI requires commercial banks to maintain a minimum
cash balance out of the deposits they receive. The RBI
monitors that the banks actually maintain the cash
balance.
2. RBI sees that the banks give loans not just to profit-
making businesses and traders but also to small
cultivators, small-scale industries, small borrowers,
SHGs, etc.
3. RBI issues guidelines for fixing rate of interest on
deposits and lending by commercial banks.
4. Periodically, banks have to submit information to the RBI
on how much they are lending, to whom, at what interest
rate, etc.